"Overall, the tone of this report was disappointing as it points to a weak start to spending activity this year, despite the significant boost to disposable income from lower gasoline prices," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Wall Street had expected core retail sales to increase 0.4 percent last month. The soft reading could see economists trim their forecasts for first-quarter GDP growth. The economy grew at a 2.6 percent annual pace in the fourth quarter.

U.S. stock index futures pared gains on the data, while the dollar slipped against a basket of currencies. U.S. Treasury debt prices cut losses.

Despite a 39.5 percent decline in gasoline prices since June, consumer spending has been soft in the past two months. Economists say households are using the extra income to pay down debt and boost savings.

Still, cheaper gasoline prices and robust employment gains are expected to provide a powerful stimulus to consumer spending and keep the economy on an expansion path, despite sputtering growth in Asia and Europe.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at its quickest pace since 2006 in the fourth quarter. It is expected to maintain a brisk pace of growth this year.

Strengthening Labor Market

A separate report from the Labor Department showed initial claims for state unemployment benefits rose 25,000 to a seasonally adjusted 304,000 last week, but the underlying trend remained consistent with a strengthening labor market.

The four-week moving average of claims, seen as a better measure of labor market trends as it irons out week-to-week volatility, fell 3,250 to 289,750 last week.

The economy has added more than a million jobs over the past three months, an achievement last seen in 1997. A key measure of labor market slack - the number of job seekers for every open position - hit its lowest level since 2007 in December.

In January, core retail sales were held back by a 0.7 percent drop in furniture and home furnishings sales, the biggest decline in this category since December 2013.

Receipts at clothing stores fell 0.8 percent, while sales at sporting goods stores were down 2.6 percent, their biggest drop in a year. Receipts at online stores rose 0.5 percent, while sales at electronic and appliance stores gained 0.3 percent.

Declining gasoline prices undercut sales at service stations, where receipts plunged 9.3 percent, the biggest fall since December 2008.

Weaker gasoline receipts and a 0.5 percent drop in automobile sales pushed overall retail sales down 0.8 percent last month. It was the second straight monthly decline.

Sales for building materials and garden equipment rose 0.6 percent, likely boosted by preparation for a blizzard in the U.S. Northeast. Sales at restaurants and bars rose 0.8 percent.